Business owners and individuals alike continuously look for ways to lower their tax liabilities. One of the most effective ways to accomplish this is contributing to a retirement plan. Business owners have many choices when considering a small business retirement plan. Included in these options is the Individual (“solo”) 401k Plan which can often be overlooked.
What makes a solo 401k an appropriate choice?
An individual (“solo”) 401k plan is really nothing more than a combined profit-sharing plan and 401(k) plan implemented by a self-employed individual or small business owner with no full-time employees (unless the full-time employee is the owner's spouse). However, it’s the combination of the 401k deferral and profit sharing features that may provide business owners the opportunity to maximize tax-deductible savings.
A self-employed individual reporting little business income can potentially reap the rewards of a tax-deductible employee contribution. Unlike a Simplified Employee Pension (SEP) plan where contributions are calculated as a percent of income, a self-employed business owner can defer dollar for dollar up to $17,000 (2012) into an individual 401k. This amount applies to both incorporated and unincorporated business income realized by an individual and/or their spouse.
Self-employed businesses that are fortunate to realize higher incomes can also defer additional dollars in the form of a profit sharing contribution. The owner essentially receives the best of both, the benefits of an “employee” 401k and an “employer” profit sharing plan. Here’s how the combination of the two can add up:
Self-employed business owners looking to contribute to an individual 401k must take notice of important deadlines. Incorporated businesses (i.e. S Corp or LCC) must contribute salary deferrals prior to unincorporated or SEP IRA funding guidelines; a deadline that can sometimes be overlooked.
Individual 401k Deadlines
When considering an individual 401k plan, or any retirement plan, there are always disadvantages to consider. Like a regular 401k, an individual 401k plan must follow certain requirements under the Internal Revenue Code. These may require additional time and/or money to administer. It’s highly recommended you consult with an advisor when opening a small business retirement plan or reviewing your existing plan annually.
Please contact me directly for additional questions or inquiries pertaining to opening a new individual 401k or reviewing an existing plan.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material, and is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Every investor’s situation is unique and you should consider your investment goals, risk tolerance a time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.